Controlling what young people can spend their unemployment benefits on, and moving thousands of people off the disability support pension (DSP), have been flagged in the federal government’s review of the welfare system.

It suggests streamlining welfare payments into four categories: the age pension; the DSP; a tiered work-age payment and a child payment. There would be more conditions attached to receiving welfare payments, and sanctions that would strip people of income support, for varying lengths of time, if they did not meet the “mutual obligations” requirement.

It says young and single unemployed people should receive lower rates of payment than other unemployed people, and that rent assistance should be reformed into a subsidy scheme for both public and private housing, rather than having public housing rent based on a percentage of a person’s income.

The report also identifies single parents as needing higher rates of payment as their children get older and it is more expensive to support them.

Only people with permanent disabilities should receive the DSP, and people who have partial, or short-term, disabilities should be given unemployment benefits instead, the report suggests. In addition, income management could be expanded into a national scheme so that young, unemployed people could only spend their benefits on certain things, such as food and petrol.

The head of the review, Patrick McClure, said the present welfare system was complex and inefficient, and there were actual disincentives to work. He highlighted people with mental health problems as needing different support to what they receive at present.

“Thirty per cent of people on the disability support pension have mental-health conditions which are episodic in nature; for example, severe depression or anxiety. Experts in the field express the importance of a vocational rehabilitation approach, which links them not only to clinical intervention but also to education and work,” he said on Sunday.

The social services minister, Kevin Andrews, has repeatedly called the DSP a set-and-forget payment, but he would not put a figure on the number of people who could lose the disability pension and be moved onto unemployment benefits.

“This is about recognising that the people on the DSP are not one group; they’re not the same. One of the largest groups on the DSP … is people with psychological illnesses and [a] … lot of that is episodic. There are occasions when people can and can’t work, yet the system doesn’t recognise that at the present time,” he said.

“Will they be forced off the disability support pension? No. This is about the future, as I said, not about the current system at the present time, but about how we can structure a system in the future which will give people the opportunity for what they usually want to do, and that is to be able to work, to be able to contribute. The current system is very inadequate in that regard.”

He said the committee would consider making the unemployment payment higher for people with partial disabilities. The government would get advice on how to classify people with a permanent disability.

Andrews endorsed moving young unemployed people onto income management schemes, giving them welfare in the form of debit cards that could only be used in certain places.

“We would say, you can have a debit card that precludes certain expenditure. It could, for example, preclude expenditure on alcohol. You get a card, go to the bottle shop and they say ‘sorry, transaction declined’,” he said on Network Ten’s Bolt Report on Sunday morning.

The report says income management could be used to “build capabilities as part of a case-management approach to assist the large number of disadvantaged young people not fully engaged in either education or work”.

Andrews stressed that the government would have a consultation process before making final decisions about which welfare recipients would be subject to income management.

“The government believes that income management is important. We believe that it’s had very positive effects for quite a number of people, not the least of which are women and children in indigenous and non-indigenous communities around Australia,” he said.

“In my conversations with them I’ve received many anecdotal reports about how beneficial this has been in terms of, particularly, their ability to buy food; to provide the necessities of life; to provide for their children, etcetera, but [an] extension of this, which we think is a good principle, how you do it, and what you might do, is part of this consultation process.”

The 170-page report has four main pillars, or aims: a simpler and sustainable income-support system; strengthening individual and family capability; engaging employers; and building community capacity.

There will be six weeks’ consultation on the interim report before the government is given a final version, complete with recommendations.

The Opposition’s support for the review is not guaranteed. The shadow treasurer, Chris Bowen, attacked the government’s approach to reviewing the DSP after reading a preview of the report in the Sunday Telegraph.

“I am sick of opening the Sunday paper every week and seeing Mr Andrews demonising disabled people. Labor supports measures to help people on the disability support pension back into work, where it’s possible and appropriate,” he said on the ABC’s Insiders program.

“That's what we did in office, with quite positive and remarkable results. What we don’t support is cutting people’s benefits on disability support in some brutal and blunt effort to force them back into inappropriate jobs. We won’t support that.”